Don't Confuse Archegos Collapse With Contagion
Mistakes were made, money was lost, but not for a lack of attention or knowledge.
Some Wall Street losses are no surprise.
Photographer: Michael Nagle/Bloomberg via Getty Images
A lot of overheated rhetoric is wafting around concerning the inability of Bill Hwang’s Archegos Capital Management to meet margin calls. But this is an everyday Wall Street story writ large, not a disaster that should worry regulators or anyone outside of Archegos and its lenders. The fund was not overly levered and its risk was not hidden. We may find out additional details, but from what we currently know there’s no reason to assume this was more than a losing trade by a very rich person.
One reason many seem to be over-reacting is because of reports that Archegos’ approximately $10 billion of capital (basically Hwang’s net worth) supported $50 billion to $100 billion of market positions. These figures, if accurate, are gross notional leverage, which adds together the notional value of the fund’s long and short positions. If Archegos borrowed $40 billion to buy $50 billion of one stock, that would be a lot of leverage. A 20% down move, not uncommon in individual stocks, could reduce the fund’s capital to zero and threaten its lenders with losses. But no prime broker would lend 80% of the purchase price of a single stock.